City of Los Angeles v. DOT

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 7, 1999 Decided February 5, 1999

No. 98-1071

City of Los Angeles, et al.,

Petitioners

v.

United States Department of Transportation, et al.,

Respondents

Airports Council International--North America, et al.,

Intervenors

On Petition for Review of Orders of the

United States Department of Transportation

Steven S. Rosenthal argued the cause for petitioners. With
him on the briefs were Jeffery A. Tomasevich, Scott P. Lewis,
Kenneth W. Salinger, Ronald N. Wilson, Stanley A. Zamel,

and Breton K. Lobner. Leilani F. Battiste entered an ap-
pearance.

Thomas L. Ray, Senior Trial Attorney, United States
Department of Transportation, argued the cause for respon-
dents. With him on the brief were Joel I. Klein, Assistant
Attorney General, United States Department of Justice, Rob-
ert B. Nicholson and Marion L. Jetton, Attorneys, Nancy E.
McFadden, General Counsel, United States Department of
Transportation, and Paul M. Geier, Assistant General Coun-
sel.

Jonathan S. Franklin argued the cause for intervenors Air
Transport Association of America, et al. With him on the
brief was Allen R. Snyder.

G. Brian Busey, Anthony L. Press, and Patricia A. Hahn
were on the briefs for intervenor Airports Council Interna-
tional--North America.

Before: Silberman, Sentelle and Randolph, Circuit
Judges.

Opinion for the Court filed by Circuit Judge Silberman.

Silberman, Circuit Judge: The City of Los Angeles in-
creased the landing fees at Los Angeles International Air-
port, and the airlines challenged those fees as unreasonable
before the Department of Transportation. The DOT set
aside the increased fees, reasoning that the City's attempt to
recoup its "opportunity costs" through the fees was impermis-
sible as a matter of statute. In City of Los Angeles v. DOT,
103 F.3d 1027 (D.C. Cir. 1997), we rejected that statutory
interpretation and remanded for the DOT to consider the
opportunity cost issue as a matter of policy. The DOT did so,
concluding that the City's claimed entitlement to recover its
opportunity costs was unreasonable, and rejected the fees.
The City petitions for review. We deny the petition.

I.

Until 1993, the City of Los Angeles, pursuant to a contrac-
tual agreement with the airlines, established landing fees at

the Los Angeles International Airport (LAX) based on a
residual methodology. Under that technique, the City esti-
mated the revenue and cost attributable to non-aeronautical
operations--such as parking contracts and concession fran-
chising--for the coming fiscal year. Expected non-
aeronautical surplus, if any, was then applied toward the
anticipated cost of aeronautical operations. Landing fees
were set (based on estimated landed weight) at a sufficient
level to make up for the remaining aeronautical cost. In
1992, the last year in which the City used this methodology,
the fee was $.51 per 1,000 pounds of landed weight. In 1993,
the expiration of the City's contract with the airlines opened
the door for the City to adopt the potentially more lucrative
compensatory fee methodology. That approach treats aero-
nautical operations separately from non-aeronautical opera-
tions; the airport sets landing fees at a sufficient level to
compensate it for the entirety of its aeronautical costs, and
any surplus or deficit from non-aeronautical operations is
irrelevant.

The City also decided in 1993, for the first time, to include
in its estimated aeronautical costs a charge reflecting the
current annual fair market rental value of the land on which
the airfield rests. The City thought itself entitled to recover
this "opportunity cost," for only then would the City be
compensated fully for the cost of using the land as an airport
instead of pursuing its alternative opportunity to earn profits
by renting the land.1 The City appraised the current fair
market value of the land at $150,000 per acre. (The City had
purchased most of the 1,780.3 acres on which the airport is
built over 50 years ago at an average price of $2,427 per
acre.) Adjusting for the effects of federal grants and con-
verting to an annual rental value, the City arrived at a figure
of $8,348 per acre per year, or $14,861,900 per year for the
entire 1,780.3 acres occupied by the airport. Putting this fair

__________
1 A leading economics text defines "opportunity cost" in this
way: "[M]aking a choice in effect costs us the opportunity to do
something else. The alternative forgone is called the opportunity
cost...." Paul A. Samuelson & William D. Nordhaus, Economics
128 (16th ed. 1998).

market rental value, among other costs, into its compensatory
fee calculation, the City computed a landing fee of $1.56 per
1,000 pounds of landed weight (effective July 1, 1993), an
increase of more than $1.00 over the 1992 fee. When contract
negotiations looking to a compensatory fee agreement be-
tween the City and the airlines broke down, the City unilater-
ally imposed the $1.56 fee by ordinance, informing the airlines
that they could not land at LAX unless they paid the in-
creased fee.

The airlines challenged the fee increase pursuant to an
expedited administrative procedure in which the Department
of Transportation has authority to set aside unreasonable
fees. See 49 U.S.C. s 47129 (1994); see also Anti-Head Tax
Act, 49 U.S.C. s 40116(e)(2) (1994) (providing that a political
subdivision of a State may levy or collect "reasonable ...
landing fees"); 49 U.S.C. s 47107(a)(1) (1994) (requiring fed-
eral airport grant recipients to assure the DOT in writing
that "the airport will be available for public use on reasonable
conditions"). The Department determined the fee unreason-
able, reasoning that the Anti-Head Tax Act's "requirement of
reasonable fees ... mandat[es] the use of historic cost for
airfield land"--i.e., the original acquisition cost of the land on
which the airport was built--and thereby forbids consider-
ation of opportunity cost. Los Angeles Int'l Airport Rates
Proceeding, Order No. 95-6-36, at 24 (June 30, 1995). In the
meantime, the City had announced a new landing fee in 1995
of $2.06 per 1,000 pounds of landed weight (effective July 1,
1995), again including among its costs its claimed "opportuni-
ty cost," i.e., the forgone fair rental value of the airfield land.
The airlines challenged this fee before the DOT, and the
Department set the fee aside for the same reason given in
rejecting the 1993 fee. Second Los Angeles Int'l Airport
Rates Proceeding, Order No. 95-12-33 (December 22, 1995).

In City of Los Angeles v. DOT (LAX I), 103 F.3d 1027
(D.C. Cir. 1997), we granted the City's petition for review of
the Department's decision regarding the 1993 fee. (We had
stayed proceedings relating to the 1995 fee pending our
review of the Department's decision on the 1993 fee.) We
concluded that the Department had no basis for its view that

the Anti-Head Tax Act forbade the consideration of opportu-
nity costs in determining the reasonableness of landing fees
and permitted only the consideration of historic costs. Id. at
1032. Although we noted that "[h]istoric cost is ... one
permissible measure of costs in cost-of-service rate-making,"
we rejected the "Secretary's view of historic cost as the
apodictically indicated measure of 'actual cost.' " Id. Ac-
cordingly, we vacated the Secretary's decision and remanded
"for his fuller consideration of the respective merits of the
historic cost and [opportunity cost] methodologies here at
issue." Id. We granted the Department's request for a
remand of the 1995 fee proceeding to conduct a similar policy
evaluation of the competing methodologies. See Air Trans-
port Ass'n of Am. v. DOT, No. 96-1018 (D.C. Cir. March 7,
1997) (per curiam order).

On remand, the DOT consolidated the 1993 and 1995 fee
proceedings. As before, the Department held that the 1993
and 1995 fees should be set aside because it was unreasonable
for the City to recover its claimed "opportunity cost." Los
Angeles Int'l Airport Rates Proceeding and Second Los
Angeles Int'l Airport Rates Proceeding (Remand Decision),
Order 97-12-31 (December 23, 1997). But this time the
Department rested its decision explicitly on policy grounds.
It pointed to the airport's obligation as a federal airport grant
recipient to keep the airport "available for public use," 49
U.S.C. s 47107(a)(1), and to another provision that bars a
grant recipient from making any alteration to the airport's
layout unless the Secretary decides that the change will not
"adversely affect the safety, utility, or efficiency of the air-
port," id. s 47107(a)(16)(C). See Remand Decision at 13.
These provisions forbid the City from converting the airfield
land to rental property; the City at present has no lawful
opportunity to use the land in any capacity other than as an
airport. (Although the Department and the City seem to
disagree on precisely when the City's grant assurance obli-
gation will expire, it is undisputed that the grant assurance
obligation is currently in force.) The Department therefore
concluded that it would be unreasonable for the City to

recover compensation through its landing fees for a "lost
opportunity" that does not lawfully exist. See id. at 14.

Alternatively, the DOT held that even if the City were
thought to incur opportunity costs, the fees should be set
aside because the City's "benefits" from operating LAX al-
ready sufficed to cover the City's opportunity costs. The
Department viewed the City, rather than the airport, as the
relevant economic actor; pursuing the rental opportunity
would require the City either to build a new airport (or
expand an existing minor airport such as Long Beach or
Orange County), or else simply to go without a major airport.
The latter option, according to the Department, would entail
an enormous loss to the City; a 1992 study quantified the
benefits of LAX "in terms of jobs (402,000); direct, indirect,
and induced economic impacts ($37 billion per year); and
state and local taxes ($1.7 billion per year)." Id. at 17. And
the City would sacrifice the current revenue the City earns
from its airfield and non-airfield activities at LAX. In the
Department's view, these losses far outweigh any reasonable
forecast of rental revenue--the City's estimate of that reve-
nue, recall, was a mere $14,861,900 per year. In short, the
stream of benefits from using the land as rental property
rather than as an airport would be smaller than the stream of
benefits from operating the airport--i.e., the opportunity cost
of using the land as an airport was already being covered.
And the Department thought the calculus would not be much
different if the City, rather than going without a major
airport, attempted to build a new major airport or expand
existing minor airports. Relying on the City's own appraisal
firm's report that the "relocation of the Los Angeles Interna-
tional Airport (LAX) is practically impossible" given the
paucity of alternative airport development sites and the pro-
hibitive costs of acquiring such a site, the Department con-
cluded that once these costs were taken into account, the net
profit from renting the LAX land would again be outweighed
by the benefits of using the LAX land as an airport. Id. at
18-19. In the end, the Department concluded that the City's
analysis of its opportunity costs--which treated only the
airport as the relevant economic actor and considered only

the annual rental income of $14,861,900--was overly simplis-
tic, and therefore rejected the City's attempt to include its
self-described "opportunity costs" in calculating its landing
fees.

We should briefly mention a related proceeding, the DOT's
effort to fulfill its statutory mandate under 49 U.S.C.
s 47129(b)(2) to publish final regulations, policy statements,
or guidelines establishing the "standards or guidelines that
shall be used by the Secretary in determining ... whether an
airport fee is reasonable." In June 1996, the Secretary
published a regulation entitled the "Policy Regarding Airport
Rates and Charges." See 61 Fed. Reg. 31,994 (June 21,
1996). The regulation required airports to value their air-
field assets at historic cost, but allowed airports to use "any
reasonable methodology" in valuing their non-airfield assets.
Id. In Air Transport Association v. DOT, 119 F.3d 38 (D.C.
Cir. 1997), we vacated the regulation, challenged both by the
airlines and Los Angeles, because, inter alia, the Secretary
"simply ha[d] not explained why fair market valuation may be
appropriate for other portions of the airport, but too difficult
to use in valuing airfield assets." Id. at 44. The Secretary is
presently in the process of formulating a new regulation on
airport fees, and has issued an advance notice of proposed
rulemaking asking for comments on what cost methodologies
should be required for airfield and non-airfield fees. See 63
Fed. Reg. 43,228 (Aug. 12, 1998). The City contends that our
vacatur of the Department's regulation in Air Transport
Association somehow casts doubt on the Remand Decision
presently before us. But the Department did not rely on its
vacated regulation, see Remand Decision at 8, and has not
yet adopted a new regulation on the appropriate methodology
for non-airfield fees as compared to airfield fees.

II.

The City and the Department before us principally dispute
the reasonableness of the City's methodology of fee calcula-
tion, not the reasonableness of the magnitude of the resulting
fees.

A.

Reiterating its first reason for rejecting the City's fee
methodology, the Department submits that it is unreasonable
to attempt to include as an airfield cost the "opportunity cost"
of employing the land as an airport rather than as rental
property, for the proposed opportunity does not lawfully exist
at present. As one of the members of the panel observed, in
paraphrasing the DOT's argument, the City is like an owner
of a hot dog stand who claims his opportunity cost is the
revenue he would earn by selling cocaine rather than hot
dogs. The City contends, however, that the Department has
adopted an erroneous conception of opportunity cost; for an
economist, we are told, the present impossibility of pursuing
the opportunity to rent the airfield land does not mean that
no opportunity cost has been incurred.

At bottom, the parties' dispute as to the concept of opportu-
nity cost seems to rest on a single question: Should the legal
barrier to pursuing the opportunity be treated as immutable?
If opportunity costs are measured as of now and the grant
assurance obligation is viewed as fixed, then the Depart-
ment's view would seem inevitable. For then the City would
have no opportunity to use the land in any non-airport
capacity--the City at least would face enormous transition
costs (the cost of violating the law or perhaps of buying a
release from the obligation) in pursuing the opportunity,
which alone could render the potential profit from that oppor-
tunity small or even negative. But if we ignore (i.e., treat as
changeable at zero cost) the present legal hurdle to pursuing
the opportunity, then the City's position is much stronger.

To be sure, an economist formulating an efficient plan for
regulating the City's monopoly over landing space might well
take the City's view, treating all regulatory tools--including
existing grant assurance obligations--as easily changeable.
Cf. William J. Baumol & J. Gregory Sidak, Transmission
Pricing and Stranded Costs in the Electric Power Industry
53 (1995). But the airlines' expert suggested otherwise when
he testified that "[s]ometimes the opportunity is virtually nil,
in which case there is no opportunity cost." In any event,

that some or many economists would disapprove of the De-
partment's approach does not answer the question presented
to us. In reviewing the Department's order, we do not sit as
a panel of referees on a professional economics journal, but as
a panel of generalist judges obliged to defer to a reasonable
judgment by an agency acting pursuant to congressionally
delegated authority. See Air Canada v. DOT, 148 F.3d 1142,
1151 (D.C. Cir. 1998); LAX I, 103 F.3d at 1031 (citing
Northwest Airlines v. County of Kent, 510 U.S. 355, 366-68
(1994)); see generally Motor Vehicle Mfrs. Ass'n v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). The City
submits that our review should be more strict given that the
Department arrived at the same result on remand as it had
reached in its initial decision, but that proposition strikes us
as flatly inconsistent with the Chenery doctrine. See SEC v.
Chenery Corp. (Chenery I), 318 U.S. 80 (1943); SEC v.
Chenery Corp. (Chenery II), 332 U.S. 194, 200 (1947) ("We
held no more and no less [in Chenery I] than that the
Commission's first order was unsupportable for the reasons
supplied by that agency."). To be sure, there is some support
for the City's view in our cases. See, e.g., Greyhound Corp. v.
ICC, 668 F.2d 1354, 1358 (D.C. Cir. 1981). But as we have
more recently explained, "[w]hile we are mindful that [the
agency] has adhered to the position it first took in the
decision that we remanded, cf. [Greyhound], our review is still
a matter of determining whether the agency's final decision
'was based on a consideration of the relevant factors and
whether there has been a clear error of judgment.' " Com-
petitive Enter. Inst. v. NHTSA, 45 F.3d 481, 484 (D.C. Cir.
1995) (quoting State Farm, 463 U.S. at 43).

Here we cannot say it was irrational for the Department to
treat the grant assurances as a given and evaluate the City's
proposed methodology from that perspective. And the grant
assurance obligations may in fact be a fixed point for the
DOT. Although the Department has some control over grant
assurances insofar as the grant recipient ab initio promises
the Department to keep the airport open for public use, see
49 U.S.C. s 47107(a)(1), it is unclear whether the Department

is free at this stage to release an airport from its promise--to
do so might violate the statute.2

The City argues that the Department's "no opportunity,
hence no opportunity cost" rationale attempts an "end run"
around our holding in LAX I that the Anti-Head Tax Act, 49
U.S.C. s 40116(e)(2), does not itself proscribe consideration of
opportunity costs in establishing reasonable landing fees.
See LAX I, 103 F.3d at 1032. The City explains that under
the Remand Decision, no airport that accepts federal grants
(and thus gives grant assurances) could ever justify the
recovery of opportunity costs--the result is a "per se rule"
against using opportunity costs in calculating landing fees,
which is another way for the Department to claim that it is
legally mandated to reject the opportunity cost methodology.
But the Department did not say that it was obliged to take
into account the federal grants. Even if it were, in LAX I,
we addressed only the Anti-Head Tax Act and the expedited
review provision, see LAX I, 103 F.3d at 1032 ("Nothing in
the Anti-Head Tax Act or [the expedited review provision]
... prescribes an accounting rather than an economic concep-
tion of cost in airport ratemaking."), and did not analyze any
argument based upon the federal airport grant provision.

Intervenor Airports Council International (ACI) points to a
different alleged problem with the Department's "no opportu-
nity, hence no opportunity costs" rationale: ACI submits that
DOT has retroactively added new conditions to the City's
grant assurances by relying on those grant assurances to
deprive the City of the ability to recover its opportunity costs,

__________
2 In a contention related to its attack on the Remand Decision
as economically unsound, the City argues that the airlines, as
proponents of an order setting aside the fees, failed to carry the
burden of persuasion assigned to them by the Administrative
Procedure Act. See 5 U.S.C. s 556(d) (1994); Air Canada, 148
F.3d at 1155-56 (citing Director, Office of Workers' Compensation
Programs, Dep't of Labor v. Greenwich Collieries, 512 U.S. 267, 272
(1994)). We think this argument lacks merit, given that the airlines
did introduce in evidence the City's grant assurances, and that the
Department's conclusions turned on its own policy determination.
See Air Canada, 148 F.3d at 1157.

which ACI claims conflicts with the "clear statement" re-
quirement of Pennhurst State School & Hospital v. Halder-
man, 451 U.S. 1, 17 (1981). But we do not view the Depart-
ment's reasoning as adding new conditions to the grant.
Rather, the Department focused on a consequence of an
unambiguously imposed condition--that the airport would be
kept open for public use--that was present from the outset.

B.

Even were we to hold the Department's first rationale
unlawful, we would uphold its order. We cannot say--and
the City does not seriously argue--that the DOT's alternative
rationale, that if the City is deemed to incur opportunity
costs, those costs are already covered by the existing "bene-
fits" enjoyed by the City, is an unreasonable one. See Air
Canada, 148 F.3d at 1142; LAX I, 103 F.3d at 1031; State
Farm, 463 U.S. at 43. The City does argue that the Depart-
ment's "comprehensive opportunity cost analysis" rationale
runs into a separate legal problem. By taking into account
the current non-airfield revenue at LAX in deciding whether
the City's opportunity costs are presently covered, it is
claimed that the Department deprives the City of its right to
use the compensatory fee methodology by forbidding the City
from valuing its airfield assets without considering non-
airfield revenues.3 The compensatory fee methodology, the
City reminds us, was recognized by the Supreme Court in
Northwest Airlines, 510 U.S. at 369, and codified by Con-
gress, see 49 U.S.C. s 47129(a)(2) ("A fee subject to a deter-
mination of reasonableness under this section may be calcu-
lated pursuant to either a compensatory or residual fee
methodology or any combination thereof."). This is a clever
argument, but not persuasive because the Department in no
sense adopted a general requirement that airports must

__________
3 The compensatory fee methodology, recall, permits an airport
to set landing fees at a sufficient level to cover its airfield costs and,
unlike the residual methodology, does not require an airport to
apply any surplus from non-airfield activities toward those airfield
costs.

credit their non-airfield surpluses toward their airfield costs.
The DOT is only taking into account non-airfield revenues, as
well as all other economic benefits the City enjoys, in deter-
mining whether Los Angeles really has an uncovered oppor-
tunity cost. It is the City itself, by using the opportunity
costs concept, that has invited the Department to think
broadly about how such costs should be measured. And we
cannot hold that it was unreasonable for the DOT, when faced
for a demand for an economic analysis, to consider factors
that an economist might take into account.4

III.

The City argues that the setting aside of its fees amounted
to an unconstitutional taking. The question is entirely one of
the adequacy of the fee the Department permits the City to
charge; the Takings Clause has nothing to do with the
methodology of ratemaking. See Duquesne Light Co. v.
Barasch, 488 U.S. 299, 314 (1989); FPC v. Hope Natural Gas
Co., 320 U.S. 591, 602 (1944) ("It is not the theory but the
impact of the rate order which counts."); Jersey Central
Power & Light Co. v. FERC, 810 F.2d 1168, 1176 (D.C. Cir.
1987) (en banc). Determining whether a taking has occurred
in the ratemaking context requires us to examine whether the
authorized rate reveals that the agency has reasonably bal-
anced the investor and consumer interests at stake. Jersey
Central, 810 F.2d at 1177-78. The "legitimate investor inter-
est" is a question of

the financial integrity of the company whose rates are
being regulated. From the investor or company point of
view it is important that there be enough revenue not
only for operating expenses but also for the capital costs
of the business. These include service on the debt and

__________
4 Intervenor ACI objects that the Department's "comprehen-
sive opportunity costs analysis," carried to its logical conclusion,
could prevent airports from charging landing fees at all, depending
on the level of benefit provided to the residents and businesses of
the city-owner. But the Department has not in fact pursued that
approach--to do so would raise a serious Takings Clause question.

dividends on the stock. [The return] should be sufficient
to assure confidence in the financial integrity of the
enterprise, so as to maintain its credit and to attract
capital.

Id. at 1176 (quoting Hope, 320 U.S. at 603).

The Department contends, and we agree, that these princi-
ples do not precisely carry over to the situation presented
here of a municipally-owned airport as the regulated entity.
A municipality has no stockholders, so it makes little sense to
analyze the proper return on equity. That is not to say that
the Takings Clause has no application here. The Supreme
Court has explained that the Clause applies to the federal
government's condemnation of property owned by a local
government, see United States v. 50 Acres of Land, 469 U.S.
24, 31 (1984), and we see no logical reason why a different
rule should apply in the ratemaking context. Although the
City (LAX) does not have equity investors, it does have
bondholders, and it makes perfect sense to ask whether the
entity's rates are sufficient "to maintain its credit" and to
"assure confidence in the financial integrity of the enter-
prise." Hope, 320 U.S. at 603; cf. 49 U.S.C. s 47101(a)(13)
(providing that it is the policy of the United States "that
airports should be as self-sustaining as possible").

The only suggested "hardship" under the current fees is a
lack of flexibility in undertaking airport improvement pro-
jects. (The thrust of the City's argument is the oblique claim
that the City is being denied a "fair" rate of return.) The
City has never alleged that its current fees jeopardize the
financial integrity of LAX, and therefore the City had no
right to a hearing before the Department on its Takings
Clause claim. Compare Jersey Central, 810 F.2d at 1181-82
(regulated entity was entitled to a hearing where it "present-
ed allegations, which, if true, suggest that the rate order
almost certainly does not meet the requirements of Hope
Natural Gas, for the company has been shut off from long-
term capital, is wholly dependent for short-term capital on a

revolving credit arrangement that can be cancelled at any
time, and has been unable to pay dividends for four years").

* * * *

For the foregoing reasons, the petition for review is

Denied.